The Fed's Policy is Contradictory and Inefficient

The Fed has decided, last week, to extend its quantitative easing (QE) policy.
After « Operation Twist », which consisted in selling short-term
bonds in order to buy long-term bonds, and thus drive the latter down rate-wise,
the US central bank is back with pure monetary creation, and to quite an extent
: up to $85B a month, i.e. $45B of Treasury bonds and $40B of mortgage-backed
securities (MBS). The goal, clearly, is to help the State finance its abyssal
deficit and to help a banking sector still knee-deep in the housing crisis.
At the same time, the Fed has restated that the base interest rate would remain
at the lowest possible.

What is most notable is that the Federal Open Market Committee (FOMC) has
stated that this policy would be maintained « for at least as long as
it takes to bring the unemployment rate below 6.5% ». Now, what does
unemployment have to do with it? Is the Fed trying to take over the role of
the Labour Department? A little bit of history might help to understand this
statement.

In 1978, the United States is in full crisis, unemployment shoots up and Jimmy
Carter is thinking about his re-election. What can he do to show his electorate
he's taking charge? It will be the Humphrey-Hawkins Full Employment Act, redefining
the Fed's mandate, which now was to contain inflation while aiming for full
employment. A government can act towards unemployment because it has the necessary
tools and levers (regulation or lack thereof, lowering taxes etc.), including
a central bank! All said central bank can do is to be less and less rigorous
in its fiscal policy to achieve this goal. Thus, this decision is a purely
demagogic and Keynesian one (they go well together). What president would
dare abrogate it? None so far.

The only Fed president who dared to go against this was Paul Volker, in 1979,
who raised the base interest rate to close to 20% to kill inflation, which
provoked a short crisis but then ensured the necessary bases for the growth
of the 80-90's and a lower unemployment rate. But since then, everytime a
storm is brewing (the 2000 dot.com bubble, the crisis since 2008), the Fed's
presidents, Alan Greenspan and now Ben Bernanke, throw all rigor out of the
window and go ahead with a maximum of monetary easing, under the pretext of
not worsening the crisis and keeping unemployment under control. However,
this policy has only produced fictitious growth (2000-2007) or no growth at
all (since 2008). But this policy produces also... a lot of money, in increasing
amounts, which goes totally against the role a central bank should play.

This stupid law and its application just show how much we are living in a
confused intellectual state. It also gives the Fed president an all-too-powerful
feeling... very dangerous! And the real laws of economics, not the ones voted
by demagogic politicians, but those taught by history, show us that printing
paper money in excess always leads to hyperinflation... and to massive unemployment.
By chasing too many contradictory objectives, we miss them all.

Goldbroker.com was created to enable investors to protect their assets and
purchasing power through physical gold and silver investments. Goldbroker.com
provides 100% physical gold and silver ownership (no mutual or fractional
ownership), storage outside the banking system in a secured warehouse in Zurich,
Switzerland. Goldbroker.com is recommended by GATA (Gold
Anti-Trust Action Committee)